How does the old saying go? There are two things you can never avoid- Death and Taxes. But is there any way to legally save on taxes? Please share your ideas and comments in the section below.
Sharon Staddon, Treasurer of the Alaska Conference of Seventh-day Adventists, along with her husband, Theron, has counseled many Adventist pastors about their taxes for years. While she doesn’t claim to be an IRS professional, she recently shared these helpful insights with the pastors in Alaska and was willing to pass them on to all our pastors in the NPUC.
Tax Tips for Pastors, by Sharon Staddon
Use of personal vehicle:
- Faithfully keep a log of miles driven. Log must include date, destination, purpose of trip and number of miles driven. If you are not required to keep this log on a conference worker’s report, vehicle log books can be obtained from any office supply store.
- Report both your regular in-district travel miles as well as special out-of-district travel miles on Form 2106. Non-taxable reimbursements for those miles must also be reported on Form 2106 (line 7). If your regular travel budget is reported on your W-2 as taxable income, then only report special mileage reimbursements on line 7. However, if none of your regular travel budget is reported on your W-2 as taxable income, then report the reimbursements for both regular and special mileage on line 7. The IRS allows a higher mileage rate than the conference normally provides. But you can only claim the full IRS rate for miles whose expenses have been paid from taxable income. If you’ve received tax-free reimbursements for any or all of your ministry miles, you can only claim the difference between the conference rate and the IRS rate for those miles. If the year end payroll summary from your conference does not include information regarding non-taxable mileage reimbursements, please request it from the payroll department.
- Maximum parsonage that can be claimed is the lesser of:
- Maximum amount voted by the conference executive committee
- Fair rental value of furnished house plus utilities
- Amount actually spent
- If the amount you actually spent is less than/more than the amount claimed on your W-2 form, and you are within the guidelines listed in #1, you can adjust the amount claimed as parsonage allowance when filing your tax return.
- You cannot claim parsonage expenses on two residences at the same time. You can only claim the expenses incurred at the location you are actually living and working out of. e.g. If you move before selling your home and must rent or buy in the new location, you can only claim the expenses in the new location. You cannot claim any expenses for the unsold home in your prior district.
- If you take a loan on your residence, the proceeds for which are used for a non-residence related purpose, payments on that loan cannot be considered as a parsonage expense. To be a parsonage expense, loan proceeds must be for the purpose of initially buying the home, or for home improvements.
Tax Returns-Common Errors:
- Reporting ministry income on Schedule C – DON’T. You receive a W-2. All W-2 wages are reported on line 7 of Form 1040.
- Reporting ministry expenses on Schedule C – DON’T. As an employee, report ministry expenses on Form 2106
- Claiming ALL of ministry expenses on Schedule A – DON’T. Your total income is made up of two parts: non-taxable (parsonage allowance) portion and taxable portion. Compute what percentage your non-taxable portion is to your total income. That same percentage of your ministry expenses (reported on Form 2106) must be excluded (per what is known as the Deason Allocation rule) when carrying that figure to Schedule A as an itemized deduction. However, the total ministry expenses are claimed when computing your self-employment (SE) income.
- Omitting the parsonage allowance when computing SE income. The parsonage allowance is income tax-free, but it is NOT SE tax-free.
- Omitting business expenses when computing SE income. Your SE income is made up of three parts: a) W-2 box 1 figure plus b) the parsonage allowance reported on the W-2 form minus c) your ministry expenses.